Enhancing Your Investment Strategy

Matthew Lewis, who heads up CMC Markets Asia Pacific and whose firm is a co-founder and member of the Australian CFD Forum, is fighting to change the legal conditions that led to the MF Global collapse, and has strong views on how the CFD industry can improve to better protect investors and strengthen the industry for the long term.

The renewed optimism in the global economy, driven by many markets reaching new all time highs, is rubbing off on Australian investors who are coming back to the markets to enjoy healthy dividend yields from their share portfolios. Many are now looking for alternative investment options or seeking greater diversification by looking to CFDs (contracts for difference) to complement their portfolio, and gain access to instruments not available on the stock market to hedge their risk and increase returns.

CFDs are a derivative product that allow experienced investors to trade on the price movements of shares, indices, currencies, treasuries and commodities across the globe. The very nature of CFDs enables traders to profit from both rising and falling markets, meaning both bullish or the most bearish of traders can gain advantages from using them.

Investors prepared to educate themselves in CFDs can access more than 5,000 CFDs over financial instruments including global indices like the German Dax or US Dow Jones, bonds, US shares, gold, oil and more than 320 currencies from G10 countries to exotics. They can use this investment tool to re-shape their portfolios and gain greater diversity, while building in a buffer to be able to take advantage when economic or market conditions change.

For example:

By trading a CFD over Rio Tinto shares, investors can take a long or short position and gain the benefit of the reporting season bonanza without actually owning Rio Tinto shares.

On the other hand, investors who are overweight in Australian banks or are concerned about a falling Australian dollar can go “short” or hedge their physical portfolio via a sold CFD position, offsetting any falls in their portfolio value, should bank shares or the AUD plummet.

The CFD industry has had its detractors in recent years, due in part to the impact on Australian investors of the MF Global collapse, which stripped Australian investors of more than $300 million.

Client money law

Currently, Australian Client Money rules do not go far enough and allow undercapitalised CFD providers to use client funds, quite legally, to hedge their own positions or positions of other clients, due to a loop hole in Australian law.

The biggest issue facing thousands of Australian CFD traders today is whether local traders have invested their money in a CFD provider that does not fully segregate client money and potentially uses it for their own hedging activities, or the hedging activities of other clients. Traders with these providers could lose their capital overnight without entering into a single trade.

My concern is that CFD traders aren’t aware of this and there could be up to five hundred million dollars “at risk” because some traders simply haven’t asked their CFD provider if they use client funds to hedge.

A key initiative of CMC Markets and the CFD Forum is to educate investors about mitigating these risks and to help drive a higher standard of regulation.

Using client money would be totally unacceptable in any other industry and I’m fighting to bring that into law so CFD investors and traders gain the same protections that are offered in other asset classes and in virtually every other country in the world.

In addition to not using client funds, and in line with the CFD Forum’s Standards, I’m also keen to see all CFD providers in Australia sufficiently capitalised and maintain a minimum level of net tangible assets equal to, or greater than, AUD$2 million, or 10% of average revenue.

Mitigating risk for investors

CMC Markets is a co-founding partner of the CFD Forum, an industry body which is focussed on offering greater investor protection and better understanding for those trading CFDs. Along with a number of other standards aimed at increasing regulation and to benefit the end client, Forum members completely segregate client monies and adhere to a capital requirement that is double what the current regulations call for.

CMC Markets’ decision to not use client money doesn’t come without sacrifice, as having access to a huge pool of money is clearly beneficial for any business. ‘Driving change’ however is the right thing to do, and it’s the best way to stop the next potential MF Global collapse from happening to unsuspecting Australian investors.

Time is right

The time is now right for the government to close the loop hole in the client money law to give Australian CFD investors the same level of protection that they would be offered in pretty much every other country in the world.

Traders are calling out for change says Lewis, citing Investment Trends research in which an ever-growing number of traders of CFDs and FX are selecting providers that abstain from using client money for business purposes.

I liken the public image of CFDs to that of the Futures market when it began 25 years ago. Back then, the thought of placing an investment on something that didn’t exist yet – like corn or cotton – was a strange concept to the purists in the stock market and the same can be said for CFDs today.

What the future holds for the CFD industry

Following a number of initiatives and reviews by the regulators the CFD Forum is hoping for a change in the law. I’m calling to stop CFD providers using client money, to make this financial instrument more appealing to serious investors who want to introduce a good mechanism for diversifying risk, and to act as a hedging instrument or as a more cost effective derivative.

The CFD industry is still in its infancy in comparison to say stockbroking or futures trading. I am keen to see the regulators give CFDs a level playing field so experienced investors and traders can access their untapped potential and use this unique financial instrument as part of a sophisticated investment strategy.